Our Hong Kong Reopening Index +7.5% YTD

39 stocks potentially benefiting from Hong Kong & Macau's reopening

Happy Chinese New Year! It is 4721 and Year of the Rabbit.

China and Hong Kong markets are closed. The Hong Kong market opens for trading tomorrow, January 26. And the China A-share market resumes trading on Monday, January 30.

I am Qi Wang, CEO of MegaTrust Investment (HK), a boutique China fund manager based in Shanghai and Hong Kong. Total 25 years of experience in Chinese and global equities. This is my blog for MegaTrust clients and professional investors.

Today we introduce our Hong Kong Reopening Index, a portfolio of 39 stocks that potentially benefit from the reopening of Hong Kong and Macau. The investment thesis is based on pent-up demand for gaming, retail, tourism, transportation, real estate and financial services by Chinese and global visitors.

Over the longer term, we see rising strategic importance of Hong Kong as China’s “Special Administrative Region”, a much needed buffer amid the current conflict with the West. We also see increasing scarcity value of Macau as China’s only casino gaming center. We’ll share our thinking on these issues separately.

Any index mentioned in this Publication (the “Index”) is for illustrative purposes only. The Index-related information itself does not constitute an investment portfolio, trading strategy or financial product of any kind. It is not possible to invest directly in the Index. All Index-related information here is impersonal and not tailored to any person, entity or group of persons. The Index-related information may contain back-tested results, which are hypothetical and do not represent actual performance. Past performance does not guarantee future results.

Our indexing approach is briefly explained as follows:

• Inception = December 30, 2022

• All Hong Kong mainboard listed stocks

• Exclude certain GICS sectors and subsectors

• Exclude companies not operating in Hong Kong or Macau

• Minimum market cap = HKD 3 billion (USD 383 million)

• Minimum average daily trading volume = HKD 10 million (USD 1.3 million)

• Final screen to rule out nonrelated stocks

For index construction, the initial sector weights are set as follows:

• Consumer Staples and Consumer Discretionary = 50%

• Financials = 20%

• Industrials (Transportation & Logistics) = 15%

• Real Estate = 15%

Each stock is weighted according to its total market cap within the sector, and then added together.

As of the latest market close (January 20), our Hong Kong Reopening Index is up 7.5% YTD, versus an 8.4% return of the Hang Seng Index and a 4.5 return % of the MSCI Hong Kong Index (local Hong Kong stocks).

To be clear, the Hong Kong Reopening Index does not contain any Chinese Internet and Technology stocks, which have significantly outperformed the market recently. Alibaba (9988.HK), for example, is up 34.8% YTD while Tencent (0700.HK) is up 23.5% YTD, neither of which are included in the Reopening Index. This is the main reason for the Index’s underperformance versus Hang Seng.

We think a more appropriate benchmark is the MSCI Hong Kong Index, designed to measure the performance of local Hong Kong stocks (33 stocks as of December 2022). In this case, the Reopening Index beat the benchmark by 3% YTD, in just 14 trading days.

Below is the complete list of 39 stocks in our Hong Kong Reopening Index. This serves as the base of our discussion on Hong Kong investment strategy going forward.